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There are many options for cryptocurrency savings accounts out there, so take the time to review and find your best match before you sign up for one.
When discussing cryptocurrencies, most people think about buying them and investing in them in the hope that one day, they may increase in value. Today, the industry is so much more sophisticated than that and an alternative financial services industry is emerging, built entirely on this new technology.
One area that’s particularly interesting is crypto savings accounts. Just like in traditional finance, you can now earn interest on currencies like Bitcoin and Ethereum. It sounds too good to be true, but once you actually dig deeper, it’s perfectly legitimate and makes a tonne of sense.
What Is a Cryptocurrency Savings Account?
It’s surprisingly similar to a traditional bank account and earning interest there. In a traditional bank, you deposit your money and the bank lends your money out on your behalf in exchange for interest. Crypto banks are no different. You simply deposit your assets and that platform will lend your cryptocurrency to borrowers in exchange for interest.
How Does a Crypto Savings Account Work?
You’re probably wondering how that crypto bank makes money and what the economics of such a deal looks like? Well, let’s take some round numbers. Let’s say you deposit one Bitcoin into one of these lending platforms and let’s say someone else comes to the same platform and requests to borrow one Bitcoin. The borrower will need to “over collateralized” by putting up 2 Bitcoin as collateral for the loan. This helps protect the platform and you as a lender, should the borrower not pay off the loan. The platform will then charge that borrower an interest rate of let’s say 10% in order to take that loan. You, as the lender, will receive 8% interest and the platform will keep 2% for itself.
That’s a very simple breakdown of how most of these platforms operate. As you can see, it’s surprisingly risk-free for borrowers, lenders and the platforms themselves.
The obvious question from this point is why on earth would someone want to borrow Bitcoin at 10% interest? Well, there are a few reasons. Let’s say you want to renovate your kitchen and you need some extra cash to do it. You can sell your Bitcoin to pay for it, missing out on the upside potential of it and pay capital gains tax. The cost of doing this is far higher than 10% interest on using it as collateral to get a loan for your kitchen instead. Or maybe you’re convinced that Bitcoin is going to go up in price. Maybe you want more exposure to it as it goes up. Well, you can use your existing Bitcoin as collateral to get even more Bitcoin.
So, the next question can be, what are the top crypto savings accounts?
Let us discuss a few of them according to users’ choices.
Best for High Returns: BlockFi
BlockFi is arguably the most trusted and reputable platform in this space. They have the best investors, a fantastic team, they’re based in New York, they’re fully regulated, insured and have great custody partners.
Their interest rates aren’t the most competitive, but they’re still very good. For many people, the slightly lower interest rates are well worth the piece of mind they provide by being so trustworthy and reputable.
Best for Daily Interest Payouts: Nexo
If you are a quick decision-maker and can’t wait for the whole month to see an interest payout from your investment, choose Nexo as your cryptocurrency savings account. It gives daily interest payments within 24 hours.
Users who opt for Nexo can earn up to 12% APY on their cryptocurrency. Additionally, it offers over $100 million in insurance to protect users’ investments.
Best for First-Time Buyers: Coinbase
If you are new in the digital currency world and need a simpler solution for your investments, choose Coinbase. It keeps you out of a lot of technicalities and makes buying and selling cryptocurrency simple.
Using Coinbase as your savings account, US-based customers can easily earn up to 1.25% APY on US Dollar Coins.
The Bottom Line
With the world shifting towards digital currencies, go towards the smarter solution, where you get returns for your valuable investments.
There are many options for cryptocurrency savings accounts out there, so take the time to review and find your best match before you sign up for one. Good Luck!